Rupee Advances to One-Month High on Inflation, Deficit Optimism

India’s rupee rose to the highest level in almost a month on speculation falling oil and gold prices will reduce inflation and narrow a record current-account deficit, giving the central bank room to cut interest rates.

Brent crude dropped 5.9 percent in the five days through yesterday, according to data compiled by Bloomberg, a positive for a nation that imports more than 80 percent of its oil needs. India’s wholesale price-based inflation slowed to a 40-month low of 5.96 percent last month, official data showed April 15.

“The tide is turning better for India,” Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken AB (SEBA) in Singapore, wrote in a note to clients today. “The recent drop in oil prices will favor the rupee the most in Asia by reducing the twin deficits and inflation,” he said, referring to the budget and current-account shortfalls.

The currency advanced 0.1 percent to 54.08 per dollar as of 10:10 a.m. in Mumbai, according to data compiled by Bloomberg. It touched 53.9250 earlier, the strongest level since March 19. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell four basis points, or 0.04 percentage point, to 8.33 percent.

The Reserve Bank of India will cut its benchmark repurchase rate by 50 basis points to 7 percent by the end of 2013, which will attract foreign capital to Indian equities, Yokota predicted. The current-account deficit widened to a record $32.6 billion in the last quarter of 2012, official data show, and the government is also looking to narrow the budget gap from a projected 5.2 percent of gross domestic product in the year ended March 31.

Gold Plunge

Gold purchases account for more than two-thirds of India’s current-account deficit, according to the RBI. The metal’s 17 percent plunge in 2013 could help cut import costs by almost $7 billion in the 12 months through March 2014, Barclays Plc said.

Three-month onshore rupee forwards traded at 55.08 per dollar, compared with 55.22 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.91 versus 55.04. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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